World has seen the worst financial crises in 2007-2008 which led to the fallout of stock market and financial institutes of the world. When the root cause was analyzed it was found that it was result of complex financial policies, undisclosed conflicts of interest’s between third financial parties.
To overcome the root causes of financial crises, led to need for the new technology which would be hassle free and transparent and free from the third parties i.e. consumer is directly doing business with the parent company without any mediator in between. This is from where blockchain technology was coined and conceptualized by Satoshi Nakamoto in 2008.
Concept behind block chain?
Block chain technology is complex, but the idea is simple. It works on same phenomenon of decentralization. Block chain, decentralizes and distributes digital ledger that is used to record transactions across many computer database so that the record cannot be altered.
Let’s check with an example:Mr X wants to transfer money from his bank account to Mr. Y’s bank account, now to transfer money from one bank to another is a tedious and time consuming process because currently, banks have to go through correspondent banks to intermediate payments, which are time consuming and also involves transaction costs.
For making inter-bank transfer, the originating bank branch prepares a message and sends the message to its pooling center, which then forwards the message to the NEFT Clearing Centre. The Clearing Centre sorts the funds transfer transactions destination bank-wise and prepares accounting entries to receive funds from the originating banks (debit) and give the funds to the destination banks (credit).
Thereafter, bank-wise remittance messages are forwarded to the destination banks through their pooling center. The destination banks receive the inward remittance messages from the Clearing Centre and pass on the credit to the beneficiary customers’ accounts.
Above process of transaction is quite complex to understand, time consuming and costly too because we need to pay the fees to get our transaction through intermediate virtual private networks and there may be n number of intermediate which we actually don’t know.
But blockchain technology sorts these issues by removing the intermediate from between and transaction is carried directly from Mr. X to Mr. Y with minimum traction fee and little early than traditional method.
How Block chain works?
Blockchain basically works on three parameters transparency, authentication and auditing. .
It consist of multiple block that has all the details and these block are connected with each other through a chain system, and these block of chain are transparent and encrypted the transition of information can be seen by everyone. It’s just like distributed network which are well connected.
Every time there is a new transaction done every computer database starts competing with all other computer database to create a new block with all details, which ever database solves the mathematical coding and makes the block wins.
This block is authenticated and audited by the other block and once tranction is verified by all the block than the information gets stored permanently in database in encrypted but transparent form. Thus every single block is automatically accompanied by authentication and auditing process.
Blocks are linked to each other (like a chain) in proper linear, chronological order with every block containing a hash of the previous block
Even if the original block of tranction gets deleted or hacked, it does not mean you lost the transition history it’s still present in other block. This generates the trust level of block chain that every details gets stored permanently if anyone wants to erase it or hack it than they have to do it in mass level which makes it more difficult to be hacked.
One of the finest example of blockchain is bitcoin. Bitcoin is the digital currency which works on blockchain technology.
Block chain technology is not just limited to transaction it is applicable to wherever there are intermediate in between, it can be applied in ecommerce industry and government fund transfer, logistics etc.
This technology shall bring about a huge wave in the business landscape all over the in particular, it shall have an impact on the financial services industry, where banking sectors are working on block chain plans for:
- Payments and settlements
- Trade finance
- Identity management
- Money transfer
- Record keeping
- Inter-bank deals
If we relate block chain technology with respect to Indian finance industry than it can be a curse to the black marketing and hawala industry because presently all transaction made for hawala and black marketing done are unable to be tracked and government remains unaware of frauds and currency fluctuations etc. But if block chain technology is implemented in finance market than following will be impact.
Benefits of block chain technology as specified by Forbes with respect to finance marker:
- As a public ledger system, block chain records and validate each and every transaction made, which makes it secure and reliable.
- All the transactions made are authorized by miners, which makes the transactions immutable and prevent it from the threat of hacking.
- Block chain technology discards the need of any third-party or central authority for peer-to-peer transactions.
- Decentralization of the technology